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Michigan estimates that drop in tax revenues could be up to $3 billion for fiscal year

LANSING – Michigan's economy has crashed because of the coronavirus pandemic and early estimates from the state Treasury Department are that tax revenues for the 2020 fiscal year could plummet by $1 billion to $3 billion as a result, with a further $1 billion to $4 billion hit next year.

Those are scary numbers for a state with combined general fund and School Aid Fund revenues of less than $25 billion.

The state is looking at a variety of options to help offset the drops in revenue:

The impact of the $2-trillion federal stimulus package signed into law Friday by President Donald Trump is still to be measured, but it looks like direct payments to the state of Michigan — on top of money paid to individuals and local governments — could be $3.8 billion or higher, according to Federal Funds Information for States, which tracks such transfers.

Michigan is more fortunate than many states in having a $1.2-billion Rainy Day Fund, and pretty much everyone agrees that if Michigan has ever faced a fiscal monsoon that would justify tapping the fund, that time is now.

Michigan's 2021 budget, which is still a work in progress, was to include about $700 million in general fund and School Aid Fund money expected to be left over from 2020. Some of that money is the result of a fight between Gov. Gretchen Whitmer and the Legislature last fall that led to nearly $1 billion in line-item vetoes. Seen as a fiasco at the time, the budget standoff may prove a blessing in disguise.

Though further measures will almost certainly be needed, the state has already taken steps to clamp down or cut spending, including a freeze on hiring and promotions and a general halt to discretionary spending.

"We've never experienced a crisis like this and the impact on the economy," said Budget Director Chris Kolb. Having said that, "right now, it's a big unknown as to the full impact of what we're looking at."

Michigan unemployment claims have surged above 300,000, which is exponentially higher than the level of claims before Whitmer declared a state of emergency March 10. So it's clear that Michigan's personal income tax revenue — which totals about $10.6 billion — is going to take a major hit.

On March 23, Whitmer ordered all nonessential businesses to close, after earlier closing bars, gyms, theaters and many other gathering places and limiting restaurants to takeout and delivery service only. The auto plants — still the single biggest driver of Michigan's economy — are shut down for an indeterminate period. So it's safe to say business taxes — which net the state about $930 million — will also be way down.

Aside from essentials such as toilet paper and bread, and a few specialty items such as office equipment related to working from home, Michiganders have largely stopped buying things, from cars to dinners out to fuel. That will put a big dent in Michigan sales tax revenues, which normally total about $8.6 billion.

Demand for services escalating

While all of that is going on, Michigan is facing huge new demands for services, especially in the areas of health and social services, as well as information technology to allow tens of thousands of state employees to work remotely. Those costs have not been calculated, but as of Thursday, the state had already spent more than $137 million just on essential supplies such as ventilators, masks, gloves and hand sanitizer.

So a potential $3.8 billion from the federal government may sound like a lot of money, but it probably will not help address Michigan's tax revenue shortfall, because it is mainly intended to pay for additional costs the state will face as a result of the pandemic, Kolb said. In other words, if the money from the feds is equal to the extra costs state government faces, the state could still be in the hole by $1 billion to $3 billion for the 2020 fiscal year that began Oct. 1.

The state expects to receive guidance on how much federal money it will receive April 12 and gain access to at least some of those funds April 24, said Kurt Weiss, a spokesman for the State Budget Office.

Unpaid furloughs for state employees and targeted tax increases are both measures the state resorted to during the last major budget crunch during the Great Recession of the 2000s. Nobody the Free Press spoke to this week said either measure is under active consideration, though nobody is flatly ruling either out, either.

"Right now, I can't predict what is going to happen," Kolb said. "We are right now ... working with departments to implement belt-tightening," but no specific reduction targets have been set for individual departments, he said.

The state revenue-estimating conference in mid-May could be when the state has a handle on some better projections, he said.

Whitmer on Wednesday asked the Legislature to extend her emergency and disaster declarations by 70 days. Two key questions that will drastically affect the budget picture are how long the pandemic lasts, and what happens after that.

"When the all-clear sounds, how quickly are people going to venture out of their bunkers and try to resume a normal life?" asked Jim Stansell, a senior economist with the Michigan House Fiscal Agency. "Nobody knows the answer to that."

Tough decisions may lie ahead

Ron Leix, a spokesman for the Michigan Department of Treasury, said "initial modeling put numbers in the range of $1 billion to $3 billion for a 2020 impact, and $1 billion to $4 billion for a 2021 impact based on various scenarios, showing the wide range and uncertainty of the situation."

Tapping the state's $1.2-billion Budget Stabilization Fund, better known as the Rainy Day Fund, is likely. Though the details are more complicated, the state can essentially tap up to 25% of the fund if there is a dip in personal income growth. Withdrawing more than 25% would require legislative approval.

Rep. Shane Hernandez, R-Port Huron, the chairman of the House Appropriations Committee, said key lawmakers are monitoring the situation, staying in touch, examining options, and not making any rash decisions.

"We don't know what happens tomorrow.," Hernandez said. "We're preparing for different scenarios," and, in terms of potential cuts, looking at unspecified programs that are only two to three years old, he said.

"We'll have some rough ideas by May," he said. "First and foremost, we're talking about people's health.